Bonuses must be long term, report warns

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Half of all bonuses paid to company directors must be linked to non-financial measures of success if businesses are to prosper over the long term, a new report has warned.

Bonuses awarded for short-term profits and share price rises do not drive long-term corporate health and may undermine UK business “in the face of overseas competitors with more sustainable models”, according to the High Pay Centre.

In its report, Paid (OTC BB: PAYD - news) to Perform, the centre said: “The average length of shareholding in the UK is seven months. The timeframe over which chief executives’ so-called long-term incentive plans are measured is usually three years.

“It can take much longer than this to build a successful brand, develop a compelling new product or significantly increase the skills and capacity base of a company workforce.”

Deborah Hargreaves, the centre’s director, said “at least half” of directors’ bonuses should be measured against “areas like corporate social responsibility, employee engagement and customer satisfaction rates”.

Staff should have representatives on company boards and reports on social and environmental performance should be mandatory, the centre suggested. It pointed out that chief executive pay has trebled to £4.8m in a decade “without any accompanying long-term increase in share values”.

Companies like BP (LSE: BP.L - news) , Barclays (LSE: BARC.L - news) and HSBC (LSE: HSBA.L - news) have already moved towards broader measures of executive performance, and the Association of British Insurers and the Local Authority Pension Fund have expressed their support.

Shadow Business Secretary Chuka Umunna said: “The scourge of fast buck executive pay is alive and well and fuels excessive short term decision making which is bad for our economy.”